A Zero Inefficiency Stochastic Frontier Estimator
Traditional stochastic frontier models impose inefficient behavior on all firms in the sample of interest. If the data under investigation represent a mixture of both fully efficient and inefficient firms then off-the-shelf frontier models are statistically inadequate. We introduce a zero-inflated stochastic frontier model which can accommodate the presence of both efficient and inefficient firms in the sample. We derive the corresponding log-likelihood function, conditional mean of inefficiency to estimate observation-specific inefficiency and discuss testing for the presence of fully efficient firms. We provide both simulated evidence as well as an empirical example which demonstrates the applicability of the proposed method.
Subal C. Kumbhakar, christopher parmeter, and Efthymios G. Tsionas. "A Zero Inefficiency Stochastic Frontier Estimator" Journal of Econometrics (2013).
Available at: http://works.bepress.com/parms/26